Tougher regulation, a lacklustre market and cutthroat competition have led some investment banks to consider shifting their focus from acting as sponsors for listing hopefuls to becoming underwriters or taking on other roles.

The Securities and Futures Commission last month issued a consultation paper proposing measures to tighten regulation of sponsors, including requiring them to complete due diligence at the time of submitting the listing application, posting the first draft of a listing prospectus on the website of the stock exchange, and checking the work of auditors and valuers.

Most bankers are nervous about the proposal for criminal liability to be attached to those who issue seriously misleading information in the prospectus, with jail terms or heavy fines upon conviction.

Some investment bankers said that if the tougher penalties were introduced, some banks might withdraw from being sponsors.

'In fact, it is not so profitable to be a sponsor. Our firm may consider not being a sponsor for new listings but focus on underwriting,'' one banker told White Collar.

The banker said some small deals only paid sponsors HK$2 million to HK$3 million - below the HK$10 million lawyers or accountants earn. By contrast, underwriting fees can attract income of over HK$20 million to HK$30 million for a small deal, while big ones may earn HK$100 million. When sponsors also act as underwriters, the listing candidates may negotiate for the sponsor's fee to be waived.

So why do banks still act as sponsors? The simple fact is that if banks do not act as sponsor, the companies may not let them become underwriters.

But being a sponsor is a lot of work; it includes sending people to do on-site inspections, hiring independent investigators to do due diligence prior to initial public offerings, liaising with auditors and valuers and cross-checking their work. The list is long and it may take up to two years to complete.

Should a bank or broker act only as underwriter, they need only to help sell the stock to clients and may only be busy for one or two months during the offering.

And acting as underwriter does not attract jail terms and other penalties.

With the market quiet, banks may fight to be underwriters instead of taking the lead sponsors role.

SFC chief executive Ashley Alder has said the proposal to tighten regulation of sponsors is not intended to send bankers to jail but to change their behaviour. It appears some may change their role.